A New Wolf in Town? Pump-and-Dump Manipulation in Cryptocurrency Markets

Review of Finance, Forthcoming

57 Pages Posted: 24 Sep 2020 Last revised: 18 Jan 2022

See all articles by Anirudh Dhawan

Anirudh Dhawan

Indian Institute of Management Bangalore

Tālis J. Putniņš

University of Technology Sydney (UTS); Stockholm School of Economics, Riga

Date Written: November 12, 2021

Abstract

We investigate the puzzle of widespread participation in cryptocurrency pump-and-dump manipulation schemes. Unlike stock market manipulators, cryptocurrency manipulators openly declare their intentions to pump specific coins, rather than trying to deceive investors. Puzzlingly, people join in despite negative expected returns. In a simple framework, we demonstrate how overconfidence and gambling preferences can explain participation in these schemes. Analyzing a sample of 355 cases in six months, we find strong empirical support for both mechanisms. Pumps generate extreme price distortions of 65% on average, abnormal trading volumes in the millions of dollars, and large wealth transfers between participants.

Keywords: market manipulation, pump-and-dump, cryptocurrencies, overconfidence, gambling

JEL Classification: G14, G41

Suggested Citation

Dhawan, Anirudh and Putnins, Talis J., A New Wolf in Town? Pump-and-Dump Manipulation in Cryptocurrency Markets (November 12, 2021). Review of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3670714 or http://dx.doi.org/10.2139/ssrn.3670714

Anirudh Dhawan

Indian Institute of Management Bangalore ( email )

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India

Talis J. Putnins (Contact Author)

University of Technology Sydney (UTS) ( email )

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Sydney
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Stockholm School of Economics, Riga ( email )

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Latvia
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